Navigating the removal of the Bankers Bonus cap: A fine line for banks to tread

29 August 2024
News

The removal of the bonus cap last October 2023 marks a significant shift in the UK banking sector, presenting both opportunities and challenges for banks as employers. This policy change is poised to enhance London’s competitiveness on the global stage, aligning remuneration packages with those offered in major financial hubs such as New York and Tokyo. However, it also brings a host of employment law considerations that banks must navigate carefully.

Barclays was the first UK bank to axe the bonus cap, following the lead taken earlier this year by Goldman Sachs, JP Morgan and most recently Citi, with more UK banks expected to follow suit. In a recent article for The Banker, Head of Employment and Partnerships, Jo Keddie shared some brief insights for the banking sector, warning of the fine line to tread to ensure changes are implemented in a fair and compliant way.

In this article Jo provides a more comprehensive overview of the employment issues banks need to consider when removing the bonus cap, to ensure they don’t get caught out.

Enhancing Competitiveness and Talent Retention

One of the primary benefits of scrapping the bonus cap is the ability to offer more competitive remuneration packages in London and other banking hubs in the UK. We expect that it will help the City attract and retain top talent, as strong performers seek financial recognition for their contributions. With fewer restrictions on bonus amounts, London can now compete more effectively with other global banking centres, potentially drawing business back to the City from other European banking hubs.

The removal of the cap is likely to facilitate greater labour mobility. International banks can now transfer employees to UK-based roles without financial detriment, enhancing the UK’s appeal as a destination for top banking talent. Importantly, safeguards such as variable pay with deferral, malus, and clawback provisions remain in place to mitigate excessive risk-taking as the new changes come into effect across a growing number of banks in the UK.

How to fairly adjust remuneration packages

Historically, banks responded to the cap by raising base pay levels and introducing role-based allowances. With the cap’s removal, banks face the challenge of adjusting remuneration policies to allow for increased bonuses on top of already high salaries. This may involve phasing out role-based allowances in favour of a more flexible pay structure.

With these changes comes the potential for an increase in discrimination claims as employees. With “star performers” pressing for significantly increased bonuses, there is inevitably going to be others at various levels who have felt undervalued also pressing for larger bonuses and using the changes to secure better overall packages. When facing these pressures, banks are at risk of creating a two-tier workforce, with disparities between new hires and existing employees potentially leading to disharmony and resentment.

Contractual and Legal Considerations

Reducing fixed salaries to accommodate higher bonuses presents contractual and legal challenges. Banks must consult employees and ensure that the overall package is attractive to gain consent for pay reductions. Imposing changes without consent could lead to breach of contract and constructive dismissal claims.
To avoid contract claims, banks must ensure that discretionary bonus decisions are lawful, rational, and consistent. Building mechanisms into bonus policies that assess factors and KPIs rationally and reasonably is crucial. Failure to do so could result in costly and reputationally damaging claims.

Moving forward, bankers will be closely scrutinising how any discretionary elements (as opposed to more formulaic criteria) is being exercised in respect of their annual bonus. The case law we regularly relied on when examining the exercise of discretion, may well be revisited when determining whether discretion has been exercised reasonably with regard to all the circumstances or whether, instead, it was perverse and cannot be justified.

Failure to build in mechanisms to minimise these risks could well result in contract claims that are likely, due to the size of the claim, to be tested in the High Court. This inevitably is reputationally damaging, costly and is not a good use of management time. From experience, it also causes friction and morale issues internally amongst the affected workforce.

Addressing Discrimination and Equal Pay

Ensuring fairness in bonus distribution is crucial to avoid discrimination claims. Banks must justify any discrepancies in bonuses and ensure that changes to pay structures are not discriminatory. Historically, gender pay gaps in bonuses have been larger than in fixed pay, necessitating careful consideration of any changes to remuneration ratios.

Discrimination claims could arise if changes to remuneration and bonuses are perceived to be linked to protected characteristics such as age, sex, race, or religion. Such claims would be heard in Employment Tribunals, where substantial compensation and injury to feelings awards can be granted.

Trying to get the bonus ratios “right” for the different roles across banks will be important as will the need to try and justify different bonuses for different roles. For example, banks could set different ratios for different categories of employee and should then apply those ratios “equally” i.e. fairly to their employees doing the same work regardless of sex or other characteristics.

Reputational Risks

Mishandling the removal of the bonus cap could lead to reputational damage and costly claims. Banks must tread carefully, offering competitive bonus structures while ensuring fairness and legal compliance. Internal processes such as grievances should be followed to address perceived unfairness and imbalance. Remuneration policies must be carefully drafted and approved to maintain a competitive edge.

Conclusion

The removal of the bonus cap presents significant opportunities for the UK banking sector to enhance competitiveness and attract top talent. However, banks must navigate a complex landscape of employment law to implement these changes effectively. By ensuring fairness, legal compliance, and careful consideration of employee concerns, banks can successfully transition to a more flexible and competitive remuneration structure.

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Jo Keddie

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The Lifecycle of a Business – Employee grievances

29 August 2024
News

Setting up and running your own business is an amazing achievement. It requires vision, creativity, motivation and stamina. On occasion, it can even bring you fame, riches and fortune. But it can also result in reams of paperwork and cause sleepless nights. And as someone once said to me about children “It doesn’t get easier, it just changes”, so the same can be said for your business throughout its lifecycle. From setting up to exit, it will force you to consider issues that you might not previously have known anything about and it will need you to make many decisions, sometimes very quickly. What it certainly is not is mundane.

With this in mind, the corporate team at Forsters, together with some of our specialist colleagues, has written a series of articles about the various issues and some of the key points that it may help you to know about at each stage of a business’s life. Not all of these will be relevant to you or your business endeavours, but we hope that you will find at least some of these guides interesting and useful, whether you just have the glimmer of an idea, are a start-up, a well-established enterprise or are considering your exit options. Do feel free to drop us a line or pick up the phone if you would like to discuss any of the issues raised further.

We’ve already discussed various topics, including funding, employment and commercial contracts, but it’s now time to discuss when things go wrong…

Employee Grievances

It is fair to say that not everything in business is smooth sailing, especially when it comes to staff. Dealing with staff grievances properly is important to help minimise workplace conflicts and improve employee relations.

Keep reading if you want to find out:

what could trigger a grievance
why having a grievance procedure is important
our top tips for getting the grievance procedure right.

What is a grievance?

An employee could have a grievance (i.e., a complaint) for many reasons. Common grievances that we come across include:

how an employee has been treated by another – this could be as a result of a series of events or an isolated incident
working conditions relating to hours and/or pay
how an employee has been managed by their line manager
the nature of an employee’s work – this could be because they are given work they were not hired to do, or they are being given too much or not enough.

By raising a grievance, an employee forces an employer to investigate the issue with a view to resolving the matter fairly and promptly.

Employees are generally expected to try and deal with concerns informally first of all, and many matters can often be ‘nipped in the bud’ by discussion with an employee’s line manager. Where concerns cannot be resolved informally, an employee has the right to submit a formal grievance in accordance with his or her employer’s grievance procedure.

The importance of a grievance procedure

Employers are required by law to have a written grievance procedure in place. Such a procedure will typically include the following stages:

submitting a grievance in writing
conducting a hearing (so that the employee can explain the detail of their complaint)
investigating the issue(s) at hand
delivering a written outcome and implementing any recommendations
giving the employee the right of appeal.

Grievance procedures should adhere to the ACAS code of practice for disciplinary and grievance procedures, which helps ensure that employers act appropriately.

Failure to follow a fair process can land an employer in hot water. Not dealing with a grievance properly could be a breach of the implied contractual duty of trust and fidelity and generally increase the chances of things ending up in the employment tribunal; in certain circumstances where the principles of the ACAS Code has not been applied, any compensatory award given to the employee could be subject to a 25% uplift.

Handling a grievance effectively

Below we set out our top tips to getting the grievance process right:

Consider the appropriate people to be involved and ensure decision makers are impartial. Sometimes engaging external support, such as external legal or HR advisors, will be appropriate.
Conduct a reasonable investigation to ensure that all the key facts are established.
Try to deal with issues promptly and have regard to any timescales set out in the grievance procedure.
Allow employees to be accompanied.
When making decisions, act consistently with previous decisions around similar grievances, as appropriate.
Keep the employee updated, especially if things are taking longer than planned and/or the employee is absent from work.
Take steps to keep matters confidential.
Take appeals seriously and consider them carefully.

Disclaimer

This note reflects the law as at 27 August 2024. The circumstances of each case vary and this note should not be relied upon in place of specific legal advice.

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Joe Beeston

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Nina Gilroy

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Is your private drainage system compliant?

27 August 2024
News

It is not uncommon to find that rural properties are served by private drainage systems, however, it can be uncommon for property owners to be aware that they must ensure that their system complies with current regulations, known as the General Binding Rules. If a system is not compliant, it can affect or delay the sale of a property. The most recent update to these rules was in October 2023.

There are different types of private drainage systems, but we find that there are two main types:

Septic tanks
Sewage treatment plants

The regulations apply to all systems, but septic tanks and sewage treatment plants are especially affected as they can involve discharging sewage or water into natural water courses or the environment in general.

Septic tanks:

A septic tank is used for the partial treatment of wastewater from properties that are not connected to a mains sewage system. It works by collecting wastewater from toilets and drains, and retains solids within the tank, while draining the water to (usually) a drainage field, if it is compliant with regulations. The tank itself is then emptied when necessary.

In the past, septic tanks have been known to drain into water courses which is what the regulations now protect against, as this was causing polluted water. Property owners were required to upgrade their systems before 2020 to ensure that they did not drain to a water course. It is surprising how many systems are still not complaint with the current regulations.

Any upgrade or replacement system has to comply with the regulations as well as the current British Standards. It also needs to be large enough for your purpose, which is based on the daily volume of waste discharged. A permit is required from the Environment Agency where a system discharges more than two cubic metres of wastewater per day. It is not unusual for property owners to not have the required permit, which can also cause delays when selling a property.

Since October 2023, it is not permitted to discharge using the same outlet as another property if the combined discharge is more than 2 cubic metres per day; and it is not permitted to have a system which is within 50 metres of another drainage system. This can cause issues if neighbours each have septic tanks.

Property owners upgrading their systems need to ensure that they have the relevant planning permission and building regulations approval to do so.

Sewage treatment plants:

Unlike septic tanks, sewage treatment plants are permitted to discharge into water courses. This is because they include a secondary treatment for waste, making it clean enough to discharge into the water, as well as to a drainage field.

A sewage treatment plant is subject to all of the same regulations as septic tanks (except for the above difference), must comply with the British Standards and have the relevant planning permission and building regulations approval.

Summary

In property transactions, it is always advisable for a buyer to carry out a specific survey to establish whether the drainage system is compliant with current regulations. If it is not, then it is generally a seller’s responsibility to ensure that this is rectified before completion of a sale. In practice, this can be, and is more often than not, dealt with by way of reduction to the sale price of a property, with the buyer confirming they will upgrade the system following purchase. Costs to upgrade a system differ from property to property, but it is said that upgrading a system can cost in the region of £20,000 (and it is not unusual for a sale price to be reduced by that amount), and so it is important for a seller to ensure that their system complies with current regulations before they agree a sale.

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Jayne Beardmore

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A landlord’s guide to tenant administration

15 August 2024
News

Administration is a “rescue” procedure, where the primary statutory objective is to allow a company to carry on trading as a going concern. In practice, most administrations do not achieve this objective and result in a sale of certain assets and the liquidation of the remainder – the original company rarely survives.

Administration works by imposing a moratorium on legal action against the company by creditors: thus allowing the company breathing space to reorganise its affairs. Once appointed, administrators will have the power to deal with the company’s property and assets. They will often sell off parts of the business to third parties, and may grant third parties the right to occupy the premises.

Will Rent Be Paid?

If the administrators continue to use the premises for the purposes of the administration – for example, by trading from it or allowing others to trade from it – then they will be liable to pay the rent and other sums due under the lease in respect of that period as an expense of the administration. This means the sums are payable as a priority, before sums owing to the majority of creditors. They will be payable at a daily rate, for the period that the administrators use the property. Rent paid as an expense is typically paid monthly in arrears, even though the lease might state otherwise (e.g. quarterly in advance).

Rent and other sums which have fallen due for payment in respect of a period either before the administrators are appointed, or once they have stopped using the premises, are unlikely to be paid immediately or in full.

What is the Effect on any Guarantee or Other Security?

The administration of a tenant will not have any impact on a guarantee given by a third party company or individual, unless there are specific provisions governing this in the guarantee agreement. We recommend that you check the terms of any guarantee as soon as you can, and ensure that you understand what steps need to be taken in order to make a claim from the guarantor. If the guarantee is in the form of an authorised guarantee agreement (“AGA”) given by a former tenant, or the guarantor of a former tenant, you will need to serve notice (under s17 of the Landlord and Tenant (Covenants) Act 1995) on the guarantor within 6 months of the sums falling due. This time limit is strict, and the right to recovery will be lost if it is not met.

The impact of the administration on any rent deposit will depend on how the rent deposit deed has been drafted, and how the deposit is held. Again, we recommend that you check the terms of the rent deposit deed as soon as possible, and ensure you understand what needs to be done in order to withdraw sums. It is usually possible to withdraw sums to settle any outstanding liabilities of the tenant under the lease. The administrators’ prior consent for this is often required, and is usually given.

Can the Administrators Bring the Lease to an End Without My Consent?

No. Unlike some other insolvency procedures such as liquidation, administrators do not have the power to disclaim leases.

If the administrators do not want to use the premises you may find you are offered a surrender early on. Administrators will often ask for a complete release of liability under the lease upon surrender. You should consider any such offer very carefully, since accepting it may bring forward your liability for business rates or limit your ability to recover unpaid arrears or claim for dilapidations.

You should also be careful of any attempts by the administrators to return keys to the property, as this may give effect to a surrender by operation of law if accepted by the landlord (or its agents). If keys are returned, then it should be made clear that they are being held on the tenant’s behalf for collection.

Can I Terminate the Lease and Re-Let the Premises?

Any surrender of the lease requires the agreement of both parties, in the usual way.

Whilst a tenant is in administration, the usual position is that a landlord may not forfeit the lease without either the consent of the administrators or the permission of the Court. A landlord may request the administrators’ consent to forfeit. If the administrators refuse, their reasoning should be examined carefully- the Court may take a different view.

If a landlord considers it likely that a tenant may shortly enter administration, it may wish to consider forfeiting the lease at an earlier stage and before these protections come into effect (assuming of course that the landlord has grounds to do so).

There is a Third Party In Occupation: What Are My Rights?

Administrators often let third parties into occupation of premises- often in breach of the terms of the lease! This is usually done as part of a sale of the company’s assets, by which the administrators permit the purchaser to occupy pursuant to a licence pending a formal application for landlord’s consent to assign. While the moratorium makes it harder to take action against the administrators, such action will usually be a breach of the tenant’s covenant not to assign without consent and the usual rules and the provisions of lease will apply to any subsequent application for consent that is made. You should check your rights under the lease carefully as this may be an opportunity to insist on the provision of additional security for the new tenant’s covenants and/or payment of any arrears as a condition of the assignment – most modern leases will contain provisions that entitle the landlord invoke such conditions.

When dealing with such applications, it is worth remembering that the landlord’s duties under the lease and statute are owed to the tenant, not the proposed assignee.

If your preferred course is to recover the premises, it may be possible to pursue a forfeiture strategy based on the breach of the tenant’s covenants but this will require the court’s permission if the administrators will not consent to it. It may not be possible to convince the Court to grant consent to forfeit where the occupation of the premises by the third party is helping to achieve the aims of the administration, and rent is being paid.

How Do I Get the Court’s Permission to Forfeit or Enforce the Adminstrators’ Duty To Pay Rent?

The administration will be listed in the High Court and, like most creditors, landlords can make applications in the administration for the Court to determine. These applications are governed by the insolvency legislation, so the Court will consider your application in the context of the whole administration process and, if successful, its impact on other creditors. These additional considerations can sometimes see one creditor’s rights not enforced even though there appear to be clear grounds for doing so on a purely contractual level. That said, many applications can and do succeed, so it is important to take stock early and execute any strategy with the benefit of expert advice.

Author

Charlotte Ross

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Financing Biodiversity Net Gain requirements – who pays? Sophie Smith shares her thoughts with Sustain

9 August 2024
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Best practice is yet to emerge on how responsibility and cost for compliance with biodiversity net gain (BNG) planning requirements in England will be split between developers, landlords and occupiers. In this article, Sophie Smith, an associate at law firm Forsters, discusses how to lessen the likelihood of disputes between these parties and whether BNG considerations are likely to slow an already sluggish planning system.

BNG aims to leave the biodiversity position of development sites in a measurably better state than before the development was carried out, maintained over a 30-year period. Developments are required to deliver a 10% increase in biodiversity value relative to the pre-development value of the onsite habitat.

Achieving this comes with costs which landowners must factor into the price paid for development sites at the outset. Depending on whether the net gain is provided on-site, off-site, via the purchase of statutory creds, or as a combination, BNG compliance costs arise differently.

For on-site delivery, in addition to the initial cost during development, ongoing maintenance costs throughout the 30-year period will arise. Depending on the nature of the site and at what stage the landlord-tenant relationship arises, these costs could be recovered via service charge. From a landlord perspective, the leasehold allocation of responsibility for BNG should be considered from a future onward sale or funding perspective. Traditionally, landlords have expected a “clean” rent and there is no reason why that could not capture maintenance of on-site, and off-site mitigation. We expect landlords will take a robust position on this, but whether the market will accept that remains to be seen.

Responsibility for maintaining BNG for the requisite 30-year long period will bind successor interests in the site. Where the on-site gain is secured by a s106 agreement, depending on how the s106 is drafted, it could relieve occupiers from responsibility for maintaining onsite BNG. This is distinct from any leasehold covenant of the tenant to be responsible for BNG and apportioning financial and/or active maintenance responsibility for BNG amongst a multi-let estate. Factors to consider include where the relevant mitigation is located within the site and the level of maintenance required to protect the net gain. Careful consideration will be required as to the initial delivery of BNG and separately its ongoing maintenance, particularly in terms of phased planning permissions.

Whilst BNG mitigation is a hierarchical system, with the onus being on on-site delivery in the first instance, an alternative option is to deliver the required BNG by securing off-site units. Whilst this could be expensive for landlords in terms of upfront costs, off-site BNG delivery gives developers more freedom on-site resulting in neater solutions.

A last resort is the purchase of statutory biodiversity credits from the Government, which are invested in habitat creation in England. Depending on the distinctiveness of the habitat, a measure based on the type of habitat and its distinguishing features, such credits can cost anywhere between £42,000 per unit rising to a maximum of £650,000 per unit for the highest value water environments. These costs can be more than ten times the price of delivering on site, according to CBRE, making them significant for developers.

Advance planning, from both landlords and tenants, is crucial to successfully financing and complying with these planning requirements. Equally, additional time should be factored into developments owing to a lack of resource at local authority level, which may cause delays both in obtaining planning permission and discharging the associated pre-commencement condition.

This article was published on Sustain on 07 August and can be read here.

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Sophie Smith

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Building Blocks of Tax – Elizabeth Small writes for Taxation

8 August 2024
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In an article for Taxation Magazine, Corporate Tax Partner, Elizabeth Small considers the recent Supreme Court decision in Centrica Overseas Holdings Ltd v HMRC [2024] UKSC 25.

Centrica (the company which owns British Gas) argued that the fees charged by its professional advisors on the sale of one of its assets was a management expense and should be deemed to be a revenue expense and therefore deductible from their corporation tax bill. The Supreme Court unanimously dismissed Centrica’s appeal and held that the expenditure was capital in nature and could not be deducted.

In the article, Elizabeth looks at the facts of the case and discusses why being able to differentiate between capital and revenue expenditure is a fundamental part of the UK tax and in this case, a holding investment company’s ability to deduct deal fees. With reference to the Supreme Court judgement the article considers the three legal tests which help determine whether something is revenue or capital in nature and sets out the principles which the court applied to reach its decision, and how early in the process the advisory fees may become costs of disposal.

Read the full article here.

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Elizabeth Small

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Victoria Du Croz and Amy France share how housing need is an age-old issue with Property Week

2 August 2024
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The government must factor older people’s accommodation needs into its plans to boost housing supply.

It has been refreshing to see planning policy at the forefront of the new Labour government’s initial announcements. Many in the industry have welcomed the approach being taken by the government and we certainly need ambitious growth plans for housing delivery if we are to redress the under delivery of the past decade. However, we also need a nuanced approach to ensure a range of housing is delivered to meet the needs of all members of society, and the delivery of specialist housing for older people in particular needs to be addressed.

A recent JLL report indicates that there will be a shortage of up to 46,000 later-living homes in the next five years. The challenges facing the sector include competition from mainstream housebuilders for sites; the impact of inflation on build costs and viability; and the planning system, which continues to stymie development.

A review of appeal decisions for later-living development indicates that establishing the ‘need’ for these facilities takes up a huge amount of time at the planning committee stage and subsequently at appeal. The difficulties are in part due to the range of care models available, which often leads to planning applications for developments where the residents will have specific care requirements.

However, need assessments carried out by local authorities often use data from the Care Quality Commission based on the number of registered beds available (ie, the maximum number permitted, which may be more than the actual number provided) and apply that to their duty of care to provide support to all those over the age of 65.

The data available is often not directly applicable to the proposed development, so assumptions and extrapolations need to be made. Further clarity is urgently needed to help local planning authorities formulate local plan policies that meet the needs of the communities in their administrative area.

The National Planning Policy Framework (NPPF) requires local planning authorities to plan for housing to meet the needs of older people, with the 2023 NPPF changes expanding that definition to reference “retirement housing, housing with care and care homes”. However, this does not encompass the wide range of available models, such as integrated retirement communities, sheltered housing, extra care/assisted living and older persons shared ownership.

Simplistic use classes

The current Use Classes Order is too simplistic, with residential accommodation either failing within class C3 (dwelling houses) or class C2 (residential institutions). Many later-living developments will look to cater for residents with a range of care needs and with the flexibility to meet their changing needs in the future. The ability to provide for a range of care options within a facility without needing planning permissions or without rendering the whole facility sui generis would be welcomed.

The later-living sector continues to wait with bated breath for the findings of the Older People’s Housing Taskforce, which was set up to look at options for the provision of greater choice, quality and security of housing for older people. The taskforce’s objectives were to examine how to increase supply and improve housing options for people in later life, as well as to explore how to overcome obstacles to this goal. The taskforce submitted its report to the previous government on 22 May 2024. However, the general election was called before any action could be taken.

It is hoped that the new Labour government will pick up the taskforce’s report swiftly and look to implement its recommendations as a priority. Those in the sector will be looking out for proposed changes that will bring more clarity to the planning system, so that specialist schemes for older people’s housing are not inadvertently being disadvantaged at the planning stage for the reasons set out above.

Given that Labour has made it clear it aims to build 1.5 million new homes within the first five years of taking office, it would also be welcomed if the government could set out an ambitious target for the proportion of this housing that will be set aside for the specialist later-living accommodation.

There is much to be optimistic out of government in these early days of the new parliament. We can only hope that these announcements result in concrete proposals and policies that can effect change sooner rather than later, particularly for the later-living sector.

This article was released In Property Week on 01 August 2024 and can also be read behind the paywall here.

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Victoria Du Croz

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Amy France

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The Art of The Family Office: Effective Oversight, James Brockhurst and Claris Bell write for the IFC

2 August 2024
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In the evolving landscape of private wealth, the role of the family office has never been more critical. But what sets the most successful family offices apart? Private Client partner, James Brockhurst and trainee Claris Bell, share their insights in an article for the IFC Review.

Key takeaways from the article include:

The Importance of Governance: Discover how well-defined governance structures provide the foundation for a family office, enabling clear decision-making and alignment with family values.
Strategic Oversight: Understand how proactive and strategic oversight can transform a family office into a thriving organisation that adapts to changing economic climates while staying true to its core objectives.
Balancing Tradition and Innovation: Explore the delicate balance between preserving family legacy and embracing innovation to foster long-term growth.

Read the full article here on IFC Review to learn more about the evolution of Family Offices.

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James Brockhurst

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Claris Bell

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The holding pattern for non-doms – interim update but full details yet to come

1 August 2024
News

On Monday 29 July, the government published an update on its plans for the UK’s non-dom regime.

In a few areas, the latest proposals expand on those set out by the previous government on 6 March. For most of the detail, we will need to wait until the budget, which will be published on 30 October. While that is later than expected, it will buy the government time to follow through with its pledge to consult with stakeholders.

Income and gains – the FIG regime

The government has confirmed that it will press ahead with the four-year foreign income and gains (“FIG“) regime. This will be residence-based, with the concept of “domicile” being removed for tax purposes.

The remittance basis, whereby UK residents who are not UK domiciled are not taxed on foreign income and gains unless they are “remitted” to the UK, will be abolished from 6 April 2025.

Under the FIG regime, individuals who have not been UK tax resident in any of the last 10 tax years will be exempt from tax on their foreign income and gains in their first four years of UK tax residence, regardless of any remittances.

The previous government had stated that foreign income and gains arising in non-UK resident trusts (and distributions from those trusts) would also be tax-free during the four-year period. The latest paper is silent on this, suggesting that this part of the policy will be retained.

As announced before, anyone who is not (or ceases to be) eligible for the FIG regime, will be subject to income tax and capital gains tax (“CGT“) on their worldwide income and gains. Outside of the FIG regime, the income and gains of “settlor-interested” trusts will be taxed on settlors.

Transitional rules

The previous proposals included transitional rules for individuals who were already UK resident. Here, there are some changes:

Reduced rate of tax on foreign income earned in 2025/2026 – Originally, it was proposed that existing remittance basis users who did not qualify for the FIG regime on 6 April 2025 would only pay income tax on 50% of their foreign income in the 2025/2026 tax year. This relief will not be introduced.

Temporary Repatriation Facility – The Temporary Repatriation Facility (“the TRF“) will go ahead. This will allow those who have previously been taxed on the remittance basis and who have unremitted income and gains to remit them and pay tax at a reduced rate.
The TRF was originally intended to be available for a two-year window from 6 April 2025 to 5 April 2027, with a reduced rate of 12%. In the latest paper, it is stated that “the rate and the length of time that the TRF will be available will be set to make use as attractive as possible.” It is, therefore, possible that we could see a lower rate or a longer period to encourage more inward investment.
The policy paper states that the government is “exploring ways to expand the scope of the TRF, including to stockpiled income and gains within overseas structures”. This is new, as the proposals previously stated that the TRF would not be available for income and gains in trusts.
Further details on the TRF will be set out in the October budget.

Capital gains tax rebasing – The proposed rebasing for CGT purposes of personally held assets is being kept. This will allow current and past remittance basis users to rebase foreign assets to their value on a specific date. This could reduce the chargeable gain if an asset is disposed of on or after 6 April 2025 and the individual is not eligible for the FIG regime.
Originally, the rebasing date was 5 April 2019. It is now stated that the date will be set in the October budget.

Inheritance tax

As was announced in March, the abolition of the concept of domicile will also apply to UK inheritance tax (“IHT“) – again, to be replaced with a residence-based system.

This change is now due to take effect from 6 April 2025, which is sooner than might have been expected. The previous government had intended to consult on the details. The new government has stated that it will engage further with stakeholders, but does not intend to carry out a formal consultation.

It is envisaged that, from 6 April 2025:

An individual will become liable to IHT on their worldwide assets once they have been UK resident for 10 years. It is not clear whether these 10 years must be consecutive or cumulative over a longer period.

Once within the scope of IHT, individuals will remain so for 10 years after ceasing UK residence.

The residence status of a settlor will dictate whether non-UK assets within a trust are subject to IHT. It appears that residence will be determined at the time of a “chargeable event”. This would include the transfer of assets into trust, each 10-year anniversary of the trust, and a distribution of trust assets. It would also include the death of a settlor who could benefit from the trust.

The last of these changes will end the existing IHT shelter on non-UK assets provided by “excluded property” trusts.

Prior to the general election, the Labour Party had stated that there would be no “grandfathering” of existing excluded property trusts. The latest policy paper states that the government “recognises that trusts will already have been established and structured to reflect the current rules, so is considering how these changes can be introduced in a manner that allows for appropriate adjustment of existing trust arrangements, while ensuring that the treatment of all long-term residents of the UK is the same for IHT purposes.”

The intrigue caused by this elusive statement looks set to continue until further details are provided in the budget.

Planning ahead

The announcements on Monday confirmed the government’s intention to end the non-dom regime and the remittance basis of taxation, which have been features of the UK’s tax system since 1799.

The transitional provisions for the FIG regime, and the suggestion of concessions on the IHT treatment of existing trusts, will give some reassurance to those who have planned in reliance on the existing regime and now need to map out their future.

In each case, the path ahead will require careful consideration once further details are announced on 30 October 2024. In the meantime preparatory steps can be taken so that planning can proceed as soon as possible following the budget and ahead of 6 April 2025. Please contact the Forsters Private Client team to find out we can help.

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Xavier Nicholas

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